The Japanese have some wonderful descriptions for their candle patterns, and one of these is called the window. In the West we call this a gap up or gap down and whilst not common in forex markets, they occur much more frequently in stocks where prices close in the evening, and then open with a gap the following morning, due to some overnight breaking news. This of course rarely happens in the forex market, so I have taken an example from the futures market and WTI oil contacts with a great example for you to see. The Japanese call this phenomenon an window, and in essence there are two kinds, namely a rising window which is a bullish signal and the falling window, which is the bearish signal. Both signify the same thing, namely that they confirm that the move is likely to continue for the time being. Now the important point to note, and this is where many traders and chartists become confused, is that it the price of the following day, enters the price of the previous day, even if this is only the shadow of the candle, then this is not considered to be a window in Japanese candlestick analysis. This is an important point and one which is often misunderstood. So let’s look at our example above.
As you can see on the 22nd of July we had a wide spread down bar, with small shadows top and bottom which was followed the day after ( 23rd July) by a narrow spread down bar with no bottom wick and only a tiny top shadow. This is then followed by our ‘falling window’ with a clear gap between this candle and the following day’s candle. As you can see the upper shadow of the candle on the 24th July has not penetrated back into the previous day’s candle in any way, and therefore we can say that this is a true falling window and a bearish signal which confirms that the move is likely to continue for some time. Had the upper shadow breached the candle of the previous day, in any way, then we would have to discount the signal. The window concept is also important from another view ( sorry for the pun) and this is that it provides a natural break to any reversal, rather like a firebreak in controlling the spread of fires which are much in the news at the moment. In order to control a fire, deep channels are dug making it much harder for the fire to jump the gap – well the same principle applies here with a window providing a gap across which prices have to jump in order to move higher ( or lower ). This is where the Eastern Japanese candle philosophy joins with the Western support resistance philosophy which make candlestick analysis so powerful, provided you take the time to understand all the nuances and subtleties of the methodology. So keep your eyes open for falling and rising windows, as these are great signals for a continuation of the move.